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Deutsche Bank sees capital hit as Basel adds to legal woes

Thu, Jun 02, 2016 - 3:07 PM

Deutsche Bank AG, which has faced the highest legal bills among continental European lenders, will probably set aside even more capital or shrink businesses as global regulators tighten the rules for how lenders measure risk.

PHOTO: REUTERS

[LONDON] Deutsche Bank AG, which has faced the highest legal bills among continental European lenders, will probably set aside even more capital or shrink businesses as global regulators tighten the rules for how lenders measure risk.

"The big issue for us, and this is a little idiosyncratic to us, is on the operational risk side," Deutsche Bank's chief executive officer John Cryan told investors at a conference in New York this week. Implementing rules put forward by the Basel Committee on Banking Supervision for calculating so-called operational risk could lead to "quite a significant inflation in the amount of capital that would be required," he said.

The Basel Committee, whose members include the US Federal Reserve and the European Central Bank, proposed in March to bar banks from using their own models for determining how much capital they need to cover operational risk, which encompasses losses from litigation, rogue traders and cyber crime.

Such models are "unduly complex" and have led to "insufficient levels of capital for some banks," the regulator said.

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"Essentially it means we need an awful lot more capital to support the business we currently write," Mr Cryan said. "And we can't have that because we essentially don't have the access to that capital and so we'd have to reduce further the business we write or try to reprice it." And capital "required to support operational risk" is "effectively dead" because it's "not deployed in making a return," he said.

The proposal is one of the last of a series of restrictions planned in response to the 2008 financial crisis and is part of efforts to stop lenders from gaming rules by using their own assessments and calculations to comply with capital requirements.

The Basel Committee, which is accepting industry feedback and comments on the proposal until Friday, said the proposal would have a "relatively neutral impact on capital" for most banks.

Deutsche Bank's risk-weighted assets for operational risk increased by 8.7 per cent to 97.7 billion euros (S$150.5 billion) in the three months through March. That compares with a 0.2 per cent increase on average for 18 banks that disclosed figures for the period, data compiled by Bloomberg show.

The German bank has faced 12.6 billion euros of legal costs and provisions since the start of 2012, more than any other lender on the European continent.

The ECB said last week that the legal costs incurred by 26 major banks in the US and Europe totaled almost US$275 billion since the financial crisis, with lenders taking a US$140 billion hit in the two years through 2014.

Deutsche Bank, which had 5.4 billion euros set aside for settlements and fines at the end of March, will probably conclude its largest legal disputes this year, Mr Cryan said at the investor conference. Those include probes into its sales of US mortgage-backed securities and potential money laundering via its Russian branch.

Mr Cryan also took aim at other areas of what he called "Basel IV" in reference to what regulators say is fine-tuning of the current frameworks for banks.

"I'm not the biggest fan of Basel IV," he said. "The new rules that are coming in I think will impinge on what we do."

The CEO said that planned rules for market risk will push banks to take more risk while a move to standardised floors for credit risk would penalize German banks because their loans are of better quality than those of competitors in other countries.

Bank need to be able to use internal models, said Mr Cryan. "If somebody says that doesn't work any more, then actually banking starts not to work in the safest parts of banking."